Impact of Global Financial and Economic
I. INTRODUCTION
1. The global financial and economic crisis has been the most serious crisis after the Great Depression of the 1930s. The crisis has gone far beyond the financial sector and has seriously affected the real economy. Despite wide-ranging policy actions at international, regional, and national levels, financial and economic strains remain acute in 2009. Virtually no country, developing or developed, has escaped from the impact of economic crisis, although countries that were relatively less integrated into the global economy have generally been less affected. However, policy actions taken in the second half of 2008 and in 2009 cushion the impact of economic crisis and are expected help to recover global economic growth and enhance volume of world trade in the short-term, through the shape of medium-term global recovery (whether V-, U-, or W-shaped) is uncertain yet.
2. Like other developing countries, the impact of the crisis has also been increasingly felt in OIC member countries. They have been affected both directly and indirectly, although the channels of transmission are different from those in relatively more developed member countries. Some OIC member countries had already been affected by the high food and fuel prices and the global financial and economic recession has added to economic strains seriously affecting their socio-economic development. Consequently, they have been affected by slowing down in economic growth, deteriorating current account balances, shrinking remittances and development assistance, and rising unemployment and poverty. However, timely fiscal stimulus, money injections, interest rate cuts, and rise in oil- and non-oil commodity prices have helped spurred recovery in OIC member countries.
3. The human cost of the economic crisis has also imperiled the social stability and future economic emancipation of the people in OIC member countries. In particular, the Millennium Development Goals (MDGs) appear to suffer a serious setback as the decade-long gains achieved by member countries are under stress.
4. The analysis focuses on OIC 57 member countries (as a group) disaggregated into oil-exporting and non-oil exporting member countries. Since the impact of economic crisis varies across regions, the analysis also focuses on four regional economic groupings of OIC member countries namely Middle East and North Africa (MENA), Asia, Sub-Saharan Africa (SSA), and Countries in Transition (CIT). The paper presents key external and domestic factors affecting economic outlook of OIC member countries and its various regions. In particular, it focuses on the impact of economic crisis on economic growth, current account balances, and inflation. 2. Trends in Macroeconomic Indicators
The stabilization program was primarily aimed at reducing the fiscal and external deficits to a sustainable level, consistent with the reduced and declining level of aid availability. By the end of the 1980s, the external current account deficit had been already reduced to about 5 percent of GDP from between 8 to 10 percent in the beginning of the decade, and there was a similar decline in the overall budgetary deficit. However, this was achieved by cutting back on investment, both public and private, rather than by mobilizing larger domestic savings. The ratio of investment to GDP steadily declined, and the government's development budget became almost entirely dependent on foreign financing. Throughout the 1980s, the contribution of the government’s fiscal operations to domestic savings, in the form of public savings, continuously declined because of the rapid growth in current expenditures along with a stagnant and low revenue-GDP ratio. As a result, macroeconomic strains started to reappear towards the end of the decade (Mahmud 1995).
The increase in the investment rate was backed by an even more marked improvement in the domestic (and national) saving rate. A significant increase in the tax/GDP ratio in the early 1990s, following the introduction of the value added tax, helped to increase public savings and largely reduce the dependence of the government's development spending on foreign aid. Although the later was also partly achieved by an increase in domestic borrowing, the overall budget deficit was mostly within the limit of fiscal sustainability. The average annual inflation rate, as measured by the official consumer price index, came down to about 6 percent in the 1990s from about 10 percent in the earlier decade - a further evidence of successful stabilization. Clearly, the transition to democracy was accompanied by improved macroeconomic management. However, there was some evidence of periodic lapses in the fiscal discipline related to the timing of the approaching national elections, thus producing the symptoms of the so-called "political business cycle".
